Payroll-Tax Cut Could Give US Economy Major Boost

Economists are cautiously beginning to include an extension of the controversial payroll-tax cut into their economic growth forecasts for 2012, suggesting any move by Congress could be worth as much as a full percentage point of gross domestic product.

Dennis Flaherty | Photographer's Choice RF | Getty Images

“If Congress extends these income supports, as looks increasingly likely, the (first half of 2012) forecast will be raised to something closer to the recent trend of 2.5% growth,” JPMorgan economists said in their weekly research note.

Without the extension, JPMorgan was looking for economic growth of around 1.5 percent.

Extending the payroll-tax cut is far from a sure thing, however. House Republicans are expected later Monday to reject a two-month extension approved by the Senate and push for a full-year tax cut.

Unless Congress works out a compromise, some 160 million Americans would see their take-home checks cut by 2 percentage points beginning Jan. 1, when this year's 4.2 percent payroll tax reverts to 6.2 percent.

Meanwhile, there’s a debate about how much to believe the recent drop in jobless claims and how much the decline should be figured into the payroll forecast for December, which will be reported on Jan. 5. Jobless claimssurprised last Thursday with a drop to 366,000 from 385,000, the second big decline in a row.

The Bureau of Labor Statistics said the first drop, to 385,000 from 404,000, was the aided by seasonal adjustment issues but gave no such explanation for the second decline. Ian Shepherdson of High Frequency Economics opined that if the drop is for real, he could increase his non-farm payroll forecast for December to 200,000.

“Companies are realizing that the meltdown they feared in the summer and early fall has not happened,” Shepherdson wrote recently.

He noted that consumer demand has been stronger than expected and banks have been a bit more willing to make credit available.

“We have argued for some time that this shift in business conditions would generate better labor market numbers before too long," Shepherdson added, "with 200,000 private payroll gains our target for the end of the first quarter."

As it is, economists expect jobless claims to tick up to 375,000 this Thursday. While that would be a step in the wrong direction, it would still be the second lowest reading since February 2011 and bring down the 4-week moving average to 382,000 from 388,000.

As for payroll growth, the current consensus looks for a gain of 140,000 in December, a modest rise from the 120,000 of November. Private payrolls are forecast to rise 160,000.

But economists over at UBS see some upside. The improvement in claims, they say, “is one of many recent hints that payrolls may be understated.” The other is the separate household survey, which is used to calculate the unemploymentrate and has been up an average of 321,000 over the past four months (compared with just 133,000 for the payroll survey).

Economists, including those at the Federal Reserve , tend to prefer the payroll survey, which is less volatile and is the product of a larger sample. But one argument is that the household survey does a better job capturing small business job creation. The recent increase in the employment component of the National Federation of Independent Business, the leading small business economic survey, confirms their suspicions.

UBS is quick to point out, on the other hand, that tax receipts have not risen to support the optimism on jobs. But lower gasoline prices, which are down 68 cents since last spring, provide a backdrop for better consumer spending. Together with lower interest rates, UBS thinks the U.S. could have the ability to shield itself from the recessionary winds blowing from Europe.